China’s excess housing

He writes that “On March 16, the Chinese government released a seven-year plan for the continuing urbanisation of its population. So far, the process has been an important engine of China’s growth, making workers more productive by giving them better access to capital, services, and economies of scale. There have been plenty of bumps in the road, though, with huge urban districts built under government orders still waiting for their first inhabitants. This is where the adage about cooking comes in. How likely was Beijing to guess exactly the right size and number of cities to house its enormous population? Just like having food left over at the end of a meal, the risk-averse strategy was to build a little extra, in case the technocrats didn’t guess correctly the first time”.

He mentions that it is not just China that has this problem, “As the Great Recession took hold in the United States, thousands of new homes were left vacant or abandoned — notably in Florida, but in many other states as well. Spain today also has hundreds of thousands of empty properties, as jobs are much scarcer than newly built apartments. And booming Australia may have as many as 125,000 unneeded houses. Whatever the economic system, whatever the point in the economic cycle, the market for newly constructed buildings does not always clear. Developers make bets based on expectations that turn out to be incorrect. Sometimes, they might not even expect the market to clear right away; they might want to build property while construction is cheap, even if the right time to sell might be a few years away. But other developers may simply overestimate demand. Indeed, it would be astonishing if all of their forecasts for demand were correct, all the time”.

The concern, has as been noted here before is that when a downturn comes will China be able to adjust and deal with the consequences, whatever they might be.

Altman goes on to note that “The results of overbuilding are easily visible, and just as easy to poke fun at. But if China’s overbuilding is the worst planning mistake in its past quarter-century of economic development, I call that not too bad at all. Moreover, it’s not as though those empty buildings will have zero value for eternity. Just consider what happened with fiber optic cable. During the previous recession in the United States, after the bursting of the dotcom bubble in 2000, the fiber optic cable industry suffered almost as much ridicule as China’s ghost towns. Firms like Global Crossing built enormous fiber networks on the “if you build it, they will come” theory, but not enough people came. That has started to change. Last June, fiber accounted for almost 8 percent of broadband connections in the United States”.

Interestingly he theorises that “By the same token, Chinese people may yet move into some of those empty districts, especially if the relaxing of the one-child policy andincreased immigration lead to higher population growth. Changes to China’s strict internal migration rules, which are likely to occur as part of the agenda released this week, will help as well. In the grand sweep of China’s post-reform growth, any waste associated with overbuilding will probably end up as a footnote — just like those vacant condos in South Florida and the Great Recession”.

He ends the piece on a warning “These are normal growing pains in a world economy that is complex and full of frictions. In the short term, they can result in odd mismatches of supply and demand. In the long term, however, they tend to smooth themselves out. The critical question is whether it’s worse to have too much of something or too little. In the case of Chinese housing, the answer is clearly too little. Empty cities might spawn a thousand jokey articles in the Western media, but they don’t spawn many riots or rebellions at home. Millions of homeless Chinese, who can find jobs but not a place to sleep, might be another story”.

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